Bank of Baroda Stock Research Report by Motilal Oswal Financial Services
Analysis dated 28 September 2024
Sector: Banking
Price on Analysis date: Rs. 248
Target Rs. 290
(17% upside potential)
Target Period: 12 Months
Earnings to clock modest ~10% CAGR; RoA steady at 1.1%
Bank of Baroda (BOB) posted ~17% CAGR in loan growth over FY22-FY24 as it
deployed excess liquidity on the balance sheet. Its CD ratio, thus, increased ~600bp
over the past two years to 80.3%.
With intense competition for deposits, we estimate BoB’s deposit growth to remain
broadly in line with the system at ~11%. We, thus, estimate advances growth to
moderate to 11.5% CAGR over FY24-FY27 led by RAM segments, thereby resulting
in a slight rise in CD ratio to 81.6%.
NIM is expected to remain range-bound in the near term, while potential turn in
the rate-cycle will likely drive slight contraction in margins.
However, opex growth is expected to moderate after a surge in FY24, allowing for
sustained improvement in the cost ratios. We estimate C/I ratio to improve to ~45%
by FY27.
Asset quality remains robust and we estimate continued improvement in GNPA
ratios with credit cost staying well within the guided range (<0.75%).
BoB reported strong RoA expansion from 0.57% in FY22 to 1.17% in FY24. We
estimate earnings to clock ~10% CAGR over FY24-FY27, while RoA remains steady at
1.1%. We reiterate BUY with a TP of INR 290 (premised on 1.1x FY26E ABV).
Loan book to post 11.5% CAGR; RAM mix to increase
BoB reported a healthy loan growth of 13% YoY in FY24, driven by robust growth
in RAM segments (21% YoY growth in retail). The bank’s retail book forms ~21% of
the total and is expected to continue leading the overall loan growth with an
estimated 20% YoY growth in FY25. Overall, the bank expects RAM segments to
dominate the portfolio growth with its share growing from the current 45% to
60% over the next few years. This will also help improve margins and overall
profitability. We estimate a modest 11.5% CAGR in loan growth over FY24-FY27,
reflecting a moderation in systemic growth and higher CD ratio for BOB compared
to its peers.
Deposit accretion remains a challenge; cost of funds to tighten further
The deposit growth continues to be a challenge for the system and we estimate
BOB to clock 11% CAGR in deposits over FY24-FY27. The bank has reduced its
dependency on bulk deposits mix, which now stands at ~15%, down from ~17% in
1QFY24, and continues to prioritize further reductions in this area. We estimate
the CD ratio to increase slightly to 81.6% by FY27. Intense competition for
deposits and the upward pressure on funding costs, mainly led by deposit re
pricing and slower CASA growth, will keep deposit costs high over the near term.
We estimate the cost of deposits to sustain at 5.3% over FY25/26 (~5.1% in
1QFY25).
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